Spot unethical sales practices

By Ginger Applegarth

As the old saying goes, people don't buy life insurance, it's sold. That's not completely true, since most people really do need life insurance to protect the security of their loved ones. But it's in the type of life insurance and how much you buy that the adage rings true. Below are some of the things to watch out for when working with insurance agents. Keep in mind that most insurance agents are helpful and professional and that those who engage unethical practices are very much in the minority.

Consumers had very good reason to fear some agents and some companies in the 1980s and early '90s because of rampant fraud and abuse. But now the tables have turned and the insurance companies are the ones running scared.

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Life insurance as an investment

In the late 1970s, insurance regulatory changes and high interest rates drove companies to develop new "investment-related" products such as universal life insurance. Agents started to sell life insurance as an investment. Policyholders began to consider permanent life insurance products as part of their investment portfolios.

Additionally, the advent of computer software led some companies to aggressively distribute insurance illustration software based on questionable assumptions, such as interest rates of up to 13% or 14% throughout the policy's life. Other companies figured out a way to override the maximum assumed interest rate and plug in their own numbers of as much as 19%. If the software would not allow this override, an agent sometimes would pay to have a simple spreadsheet program of his own developed for use in marketing permanent life insurance policies.

The 'vanishing' premium

With these assumed high interest rates, the projections showed that the premiums would "vanish" in as little as four or five years. Normally premiums vanish because the dividends (if it's a whole life policy) or interest (in the case of universal life) are enough to keep the policy in force by paying the premiums from the cash buildup.

This is especially true for universal life insurance, because unlike whole life insurance (which has a fixed premium), a person could pay less than the recommended premium -- sometimes even skipping a year.

Many agents aggressively marketed this vanishing premium (or "premium offset") method of paying for insurance.

There is nothing wrong with the vanishing premium concept, provided that a reasonable interest rate of 5% to 6% is used in the illustration as the assumed dividend rate. Under this analysis, the premium might vanish after 15 years or so.

But because the interest rate assumptions were unreasonable, what happened was disastrous: As actual interest rates dropped, premiums did not vanish. Instead, they continued to increase for a decade or longer.

Even worse, some policyholders found that their vanishing premiums had suddenly "reappeared," and, in some cases, those premiums were more than the policyholders could afford.

Continued: 'Churned' policies

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